Japan Tobacco Buys Belgium’s Gryson for $597 Million

The maker of Camel and Mild Seven cigarettes will pay 12.3 times estimated 2012 earnings for all outstanding shares of Gryson, the Tokyo-based company said in a statement yesterday. Photographer: Akio Kon/Bloomberg

May 25 (Bloomberg) -- Japan Tobacco Inc. agreed to pay 475
million euros ($597 million) for Belgium-based Gryson NV to
boost growth in Europe’s roll-your-own cigarette market in the
biggest purchase by a tobacco company since 2009.

The maker of Camel and Mild Seven cigarettes will pay 12.3
times estimated 2012 earnings for all outstanding shares of
Gryson, the Tokyo-based company said in a statement yesterday.

The purchase gives Japan Tobacco control of Gryson’s Fleur
du Pays brand, France’s largest selling roll-your-own
cigarettes, according to the statement. Japan Tobacco President
Hiroshi Kimura has agreed to buy rivals in the U.K., South Sudan
and Belgium since 2006 as sales volumes decline in Japan, where
tax increases and an aging population damp demand.

“They paid a little bit towards the top end, but it’s
reasonable,” Erik Bloomquist, an analyst in London at Berenberg
Bank, said in a phone interview. “The business is growing
volumes by about 4 percent. The brands are ones that Japan
Tobacco International is pleased to have and they are going to
invest more in the business. So for a growing business, that’s a
reasonable multiple.”

The global roll-your-own and make-your-own market grew 3.9
percent on average between 2000 and 2011, Japan Tobacco
spokeswoman Mahoko Tsuchiya said by telephone yesterday. Western
Europe accounts for about 75 percent of global demand for the
cigarettes, which smokers make from paper and loose tobacco, she
said.

Imperial Signal

Bloomquist said the deal moves Japan Tobacco from the
fourth-biggest seller of fine-cut tobacco in Europe to number
three, behind Imperial Tobacco Group Plc. and British American
Tobacco Plc.

The deal gives a “very clear read” that Japan Tobacco is
not interested in buying Imperial, Bloomquist said. “Why do the
deal to move to number three if you are going to go for number
one?”

The cigarette maker’s market value has climbed 18 percent
this year, compared with a 1 percent drop for the broader Topix
index. The stock rose 1.1 percent to 425,500 yen at the close of
trading in Tokyo.

The purchase of Gryson, which also owns the Orlando and
Domingo brands and has operations in Luxembourg, Spain and
Portugal, will be financed from cash and borrowing from banks
and will have a “minor effect” on earnings this fiscal year,
according to the statement. The transaction is set for
completion this year, according to the statement.

Comparable Deals

Japan Tobacco had cash and near-cash items of 405 billion
yen as of March 31, compared with a five-year average of 237
billion yen, according to data compiled by Bloomberg.

The acquisition is Japan Tobacco’s largest since the 2007
purchase of frozen-food maker Katokichi Co. for about $1.4
billion including debt, according to data compiled by Bloomberg.
Japan Tobacco is paying 15.96 times earnings before interest and
taxes, compared with a median of 14.29 times for nine similar
deals, the data show.

The deal is the largest acquisition by a tobacco company
since British American Tobacco’s $644 million purchase of
Bentoel Internasional Investama Tbk in June 2009, according to
data compiled by Bloomberg.

Japan Tobacco’s domestic market share fell to 55 percent in
the year ended March 2012 from 64 percent a year earlier after
the March 11, 2011, earthquake triggered reduction of tobacco
shipments.

Net income will probably drop 1 percent to 318 billion yen
($3.9 billion) for the year ending in March 2013, while sales
are expected to rise 4 percent to 2.12 trillion yen, the company
said last month.